A-A- Font AaBbCcD ACDE ACN AaBbCd AaBbCc Pred- : Paragraph THeading 1 THeading 2 THeading 3 Normal No Spac Replace Otabe Eder Rese Select- Files Styles tting We Edtar Reuse Firs Chard Appliance (B) Exhibit 2: Chard Appliance Sales by State:2003 State Bome Arkansas 12.264,000 Colorado 10,220,000 30,660,000 49,054,000 40.300.000 1130,000 21,616,000 Oklahoma Tesa Total 10.220.000 20130000 Chard Appliance, located in Wichita, Kansas was founded in 1938 as Beads Laundry Equipment Supply, an authorized distributor of Maytag washing machines. The company grew steadily through the 1940s and 50s, adding new models and product lines as Maytag introduced them. The firm was purchased by the Chard family in 1963 when sales were approximately 3 million per year The Chards expanded the firm geographically and discontinued retail sales, concentrating on the wholesale side of the business. New brand names were added in along with the original Maytag line. By 1980, sales had risen to over $80 million. The company carried a full line of white goods such as washers, dryers, refrigerators, freezers, dishwashers, gas and electric ranges, as well as microwave ovens, and other household appliances. They carried lines of several manufacturers in addition to their own private brand. Most brande had multiple models covering a wide range of features and prices. The private brand of white goods was manufactured by Whirlpool, but no reference to the manufacturer could be made since specifications for the Chard brand were considerably different from those of Whirlpool, whose management was concerned that the impact of perceived lower quality might affect the image of the Whirlpool lines By 1990, Chard had added a line of electronics that included TV's, Stereos VCRs, and more recently, DVD players, and served retailers in 3 states including Arkansas, Colorado, Iowa, Kansas, Missouri, Nebeska Oklahom and Texas 2003, revenue had grown to over $200 million and was expected to exceed $220 million for the next year. Much of the growth was due to creased sales of electronics, especially large screen High Deflation TVs. However, the projected increase in sales was considered optimistic by some of Chardy top executives and would represent the first significant increase in more than three years Sales had stalled during the recent receni and profitability had significantly declined Exhibit 1 shows sales for Chand Appliance from 1994 through 2003 Exhibit 2 shows 2003 sales by state Exhibit Chard Appliance Sales, 1994-2003 Towa Mineur Nebrask Bill Parks was heed in 2004 as an admairysine tutto Gerald Cha President and son of the original owner, EF Chard The Monday following week of orientation, Parks was called into Chard's office it, I've p project for you. Here is a memo and report that I received last week from Wilhos, our Warehouse Manager. He sugging 500,000 ar pie of one of our warehouses Space is a limand at Bey we beg ble operating the forklifts. He said damage was getting c coneued hut I will be tak Twe going to Chicago in the morning Thursday Lock ever this wabose pains report while if you think we ought to mese e members of our staff hak projects, hat we can't and the all The leg da Parks with Jes Mos e p UTM Dile de Font Paragraph THeading 1 1Heading 2 1 Heading 3 1 Nomal 1 No Spac TVs. However, the projected increase in sales was considered optimistic by some of Chand's top executives and would represent the first significat increase in tacre than three years. Sales had stalled during the recent recessio and profitability had significantly declined. Exhibit 1 shows sales for Chard Appliance from 1994 through 2005. Exhibit 2 shows 2003 sales by state Exhibit 1:Chard Appliance Sales, 1994-2003 Year 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Revenst 108,168,000 118,955,000 113,263,000 146,590,000 164,180,000 180,598,000 198.658.000 192,698,000 190,771,000 200.310.000 Styles embers of our staff think I ass late art at this pet The g seem to think we are made out of money I he emp projects, but we can't fand them all. Sometimes think that anyone else is doing The following day, Parks met with Jim Monit, the company's p tend for the wee p indicated that Chand was reluctant to others felt about it "I work closely with early every manage is the company, said Mons regalarly with Ted Hatley, Sus Jcheson, md Fred What we all pretty clear es what needs to be done to keep this patio ring mod You can bet that we need that expat. You k We, the Wan Manager," said Moms Ted Hanley is w Traffic Manager and is in charge of sales for the Latate aces Why don't you get and get a feel for whether or sit they ap 1 think you will fal growing, maybe out in revenue, but in volume, and he is just too tight fisted to admit t Parks talked to Ted Hanley and found that he agreed His feeling was that necessary changes to increase efficiency had led to larger ships, which was creating additional pressure on storage, "Everyone is doing us part to keep costs down said Hanley, "but you can't keep operating in the need forever. We used to me a lot of our merchandise in here on LTL carriers, they have pushed for greater efficiency, so sow we more early wyg by the truckload and that requires additional seace Test Predictions On 23 words B Ef Exhibit 3 Motor Carrier Kates Tele D Vila 40 300x1000 1,000 1,000 43 AM 2000 1,000 100010000 J! 664 Survy 4 ard fu I Font B Paragraph 1 Heading 1 1 Heading 2 1 Heading 3 1 Normal No Spac Dicti Edar Feine Select- Files Styles being V Entare firs growing, maybe not in revenue, but in volume, and he is just too tight fisted to adesit it." Parks talked to Ted Hanley and found that he agreed. His feeling was that aecessary changes to increase efficiency had led to larger shipments, which was creating additional pressure on storage. "Everyone is doing his part to keep costs down," said Healey, "but you can't keep operating in the same facilities forever. We used to move a lot of our merchandise in here on LTL camiers, but t they have pushed for greater efficiency, so now we move nearly everything in by the truckload and that requires additional space." "So you order in fall truckloads then," asked Parks "Yes," replied Hanley, "almost always. I switched most of our business to Hayes Truck Lines sometime back, and we're saving some major backs Let me pull up a file, continued Hanley, and I'll show you an example." After a couple of minutes at his computer, Hanley said, "Here we go Lets look at 50 inch High Definition Plasma TVs. They have become an important item for us over the past few years, and this is one of our most popular models. Last year we sold an average of about 65 a week, and we are projecting sales this year of about 75 per week, probably as many as 4,000 total They sell for about $1,500 each, which amounts to nearly 6 million dollars in sales for this one SKU, and there is a lot of profit in them. Our base cost is about $1,200 per unit, but we get them cheaper than that because Jim Morris gets a great quantity discount You've met him, right? Our Purchasing Manager "Yes" said Parks, "but he didn't get into his parchaning policies. What kind of docouat does be get "Our supplier in San Diego gives us a 2.5 percent discount on purchases of at least 1500 or more, and a fall 5 percent of fie 2,300 or more. It is about time to order these now and whes we do, we'll being in five trackloads. That lets Jum qualify for the 5 percent discount. Think about that! If we sell 4,000 of these this year, be will save nearly a quarter of a millice dollars en Gut o Accessory invectigate Test Preditions On Exhibit 3: Motor Carrier Rates on Tele 1,000 Vehme AQ 500 1,000 2,000 2,000 5,000 5,000 10,000 10.000 San Dieg in Wichts 500 101 49.79 424 36.03 3133 21.23 Rates are per CWT ya 50% disco Ally "These things weigh about 50 pounds each, so that my 56.00 per the transportation costs Hayes charges us $1.50 p California to Wichita. Ire about 1,500 mndes dom San Dieg $2,250 per truckload. A lot of what we ship takes up a lit pounds per unit. I can't ship a full 40,000 pounds pack about 500 units per vehicle. Look at the differme That's sly at four and product a half hacks spince That's an $50,000 savings on this s I don't know what Morris told you, hat we've worked this all work together. We treaty et derece over the years. We're a good tea, and th best tre have worked 1 get the lowest transportation costs, he gets the product cheaper of time fooling wound with placing orders. If his staff cataly placing all orders, be incus more expesses He prepared art in the core and shewed that it costs him shout des pertes Wacay a lot of SKUs and by ordering each SKU two or three times Ss Job We all replay This helps Fred Wer ing as to what seeds to be de the wash and be keeps may 6's Survy 7881 TUBU Veice Edw Font Paragraph to order these now and when we do, we'll bring in five truckloads. That lets him qualify for the 5 percent discount. Think about that! If we sell 4,000 of these this year, he will save nearly a quarter of a million dollars on that one SKU, and I will get the cheapest transportation possible. New think about how many SKUs we handle, "Now," said Hanley, "take a look at this LTL tariff (see Exhibit 3) and I'll show you how much I save in transportation costs. We get these TV's out of San Diego, and Mainline is the LTL carrier we normally use when we have at LTL shipment. They give us a 60% discount, but they don't like to handle shipments of more than 10,000 pounds, and LTL. rates on shipments of less than 5,000 tha are very expensive, even with the discount. Their published rate is $31.83 per hundred for shipments of 5,000 pounds or more, and even with our 60 percent discount we would pay nearly $13.00 per hundred Styrs Edding This helps Fred Wilson and Susan Johnson, too. We all meet regalarly and an in agreement as to what needs to he dose to ran our operations efficiently. Fred runs the wareboase, and he keeps really bay receiving sed filling outbound ceders If he is constantly receiving a lot of small shipments, his people tend to make more mistakes in putting goods away, and they can't concentrate on filling outbound orders as well. By receiving large shipments of individad SKUs, he can devete large crews to the tark, and everyone karas what goes where "Susan Johnson is in charge of sales, and she doesn't have to worry shoot being out of stock near as much as if we were constantly mceiving a lot of small orders." Parks noticed some of the historical data on the computer screes that compund Hayes and Mainline, and said, "According to this, it looks like Hayes is pretty erratic with respect to delivery times. It looks like Hayes often takes up to 8 or 9 days to deliver compared to only 3 or 4 by Mainline. Why does it take them so long sometimes," be asked, "and do you ever run out of stock when they take that long? "Well," said Hanley, "Hayes is a small truckload carrier. They don't have a lot of equipment, and sometimes it takes them a few days to dupatch an empty truck to us. I could call another carrier, but Hayes gives us a better rate than anyone else I've ever called Besides, they are not actually that much different Mainline averages about 3 and half days, and Hayes' as only 5. Even when they take a little longer, it doesn't really matter that much I talk regularly with Susan Johnson in sales, and our service level is just fine Johnsen a very tyvestigate Sales on that model TV amaged around 53 units a week last year, but they we increasing and car carest sales forecast is fix 4,000 us for the year that's about 75 per werk, give or take about 20 nits (hat's what they tell me this standard deciation mean If we order when stock leal reaches smage at sales By weekly sales, we will be eut of mock a lot, foping reordering abes stock bits he level where we have at least 3 weeks apply k to contine left, we avoid these costly stockouts This gi operating (filling orders) in case the seppler is slow re des are delays transit, etc. That extra two-week's buffer her and our ba You have to lentand that is is essly import Johnson "We have to compete on predict of 669 Sunny Font THeading 1 1 Heading 2 1 Heading 3 Normal No Spac Paragraph of equipment, and sometimes it takes them a few days to dispatch an empty truck to as I could call another carrier, but Hayes gives as a better rate than anyone else I've ever called. Besides, they are not actually that much different Mainline averages about 3 and half days, and Hayes' is only 5. Even when they take a little longer, it doesn't really matter that much. I talk regularly with Susan Johnson, in salei, and our service level is just fine. Johnson is very sensitive to service. Rest assured, if this were a problem, I would have heard about it by now," Parks had lunch with Susan Johnson that day and discussed the situation. He found that she was in complete agreement with virtually everything Morris and Hanley had said. She felt, as did the others, that the company was merely experiencing growing pains, and that Chard was just afraid to turn loose of the 500,000 dollars necessary to bring their facilities in line with the demands that were being placed on them. Johnson liked Morris' ordering policies. Her sales organization had been able to maintain high service levels with respect to filling customer orders. She said, "Ordering in small quantities like we used to do can leave you open to the problem of losing sales due to lack of product After lunch, they returned to Johnson's office where she explained how effectively she felt that the departments communicated and worked together. "In fact," she said, "working together is how we solved our service problems In the past, we had been plagued with service problems, and stockouts were at the top of the list. So Hanley, Wilson, Merris, and I got together to do something about it. We realized that we could avoid virtually all potential lost sales which might occur due to stockouts simply by reordering a few days sooner than we had been, especially if they started placing larger orders instead of so many smaller ones. "We had our staffs work up computerized reorder points on virtually every SKU In most cases, it takes over a week to get an order in here from a supplier, and sometimes it's longer, so we typically place orders when we have As she was talking, she pulled up as about three weeks worth of stock left" screen on her computer with data for High Definition Televisions Take a look at this screen she said. These are the TV's you were asking about, the certigate Styles Replace E Dietate Edtr Re de Fies te V left, we avoid those costly stockouts. This press es werks to operating (ing orders) in case the supplier is slow or there a delays in transit, ete That extra two-week's buffer hat saved or have many tes e "You have to understand that service is extremely important, cand Jobeson "We have to compete on price of service Most of our c are retail stores, and they have to charge about the same price as their competitors. When they are out of stock, they will offes try competing brand, and it is not always one we sell. Furthermore, the will not always accept a sabotinute or wait Sondines they pot go to another atore. Either way, if it isn't in stock when the commmer wath it, we the ssle, to keeping our stores in-stock is very important's important cur customers, and to our supplies. A few years ago, this problem serious that we nearly lost some major suppliers. They feel the pinch to Morris, Wilson, and I decided that a two-week buffe above the average sales should be adequate, and it has been working great. Our service level rely ever a problem any more Wilson monitors the inventory levels and notifies Momis when orders send to be placed," Johnson said "It seems or current policies a good for m It is much easier to utilize his labor force when receiving large salas of s single SKU Additionally, there are fewer tracks trying to docks at the same time. It is just much easier to plan and concl operations if you are not dealing with lots of small shipmns" Johnson gave Parks a printout of the informatico on sales, which d average sales over the past six mths of 75 units per week, and em with a standard deviation of 20 units, it was clear that the tread was g somewhat. He also noted that transit time by Mainline and Heyes was both about what Hanley had told his they www, but that the standard det of transit time was caly about 3 for Mande compend to 33 the He After he finished voting with the Department Heels, Pakk Chard's office and pulled out the report on the quest for space that prepared Wilson was out of tows Picks could at talk to him KIAPM 66 Suriy ISORD Paragraph transd time from San Diego averages about 5 days, but sometimes it is 7 or t and then there is the supplier's processing time which is usually about 3 days, plus or minus a day. For those TVs, the average time from placing the order until it is delivered is & days, but it varies qade a bit Here's the sales da Styles V report, but he was duly impressed with what be read and became coined th Chad had not schaally sad theagh the report cafully. We had de very thorough job in pespring it He had ned Gew corpo das well industry data to determine average levels of space statine pert Wilson had noted: We must have floor space for aisles and order assembly-duassembly Beyond 60 percent utilization of floor space, there is simply not enough space to work. Double handling of products leads to higher labor costs, less efficient use of energy, and excessive damage Wilson's analysis indicated that the expansion would bring the level of space utilization down to about 60 percent from close to 80 percent Wilson had plotted Chard's damage levels against the percentage of space utilized and found a curve similar to that shown in Exhibet 5. Saty percent was the industry average, and be noted that the 60 percent level of utilization was "optimal" At utilization levels above 60 percent, he found that damage increased at an increasing rate. At levels below 60 percent, damage was constant. To reduce space utilization below 60 percent would merely lead to inefficiency due to A mary of Wilson's cost estimate and the benefits excess capacity resulting from the warehouse expansion are shown in Exhibit 4 Exhibit 4: Space Utilization and Damage Exhibit 5: Cat and Benefits of Warehouse Expansion Project Cost of additional space $500,000 Benefits- Reduced Damage 50,000 More Efficient Use of Labor Fuel and Energy Sacing 31,000 11.000 $100,000 Total Benefi Later that day, Paks tied to the corperate acting departine by telephone and learned that the company's cost of capitd sprsimaty percent. However, be also learned that tally are considerably above the cost of capital to jenify capital expenditures the start taways Parks also lessed that the was probably well above their cost of capital. He about the cost of carrying fentory and found that technology and the costsond induction of ses models manufacturers, stock became obsolete pahe quickly propensity for damage led to high insurance Ind Parks to conclude that the cost of carrying y apidly changing words 12 Test Predidions On Accessibaty Investigate e here to search L U 614PM 66's Sunny 14 TUNU Paragraph space utilizatice below 60 percent would merely lead to inefficiency due to excess capacity A summary of Wilson's cost estimate and the benefits resulting from the warehouse expansion are shown in Exhibit 4. Exhibit 4: Space Utilization and Damage 80 Damage Percent of Floor Space Used Styles Dietate Select Ve N Eating requests for fands were withound of the tum was gee than 15 percent, but not always Parks also learned that the company's cost of carrying inventory was probably well above their cost of capital. He talked to a industry ly about the cost of carrying story and fund fut due to the rapidly changing technology and the confiand todaction of sew models each year by many manufacturers, stock because obsolete quite quickly at ses Additionally, the propensity for damage led to high ice cos, and a host of other peens led Parks to conclade that the cost of carrying story was at least 20 percent and probably higher The next morning, Parks ran in to Ted Healey Hanley asked how things were going and noted, "You look a little frustrated Look kid, he's getting dose to retirement He just doesn't want to take a chance on turning loose of that ach capital. He would rather keep a low profile Now that you have talked in the other department heads, what do they think? Deat answer. You don't need because I know them. I work with them. We comic decisions We're all on the same page Atena Chard Appliance General Instructions 1. Calculate the Economic Order Quantity (EOQ). 2DS a. EOQ = Q* = IC 2. Calculate the safety stock (SS) required for each shipping option (LTL and TL). a. MT+0 SS=ZULT 3. Calculate the total cost for EOQ including product and transport (T) costs. a. TC= ()s+1 C(+SS)+D+T+D*C S+I